Transition Inflation - 2 - ORIGINAL CONTENT

The previous commentary did a “freeze frame” and looked at the energy transition as a steady state event for simplicity. However, the actual transition is far from a steady state event. Electricity demand and consumption is growing, both as the result of the transition to “all-electric everything” and as a result of the growing demand and consumption of data centers and Artificial Intelligence.

At the beginning of the transition the US had an energy system which satisfied the needs of the market for electricity and fossil energy. However, the goal of the transition is replacement of the current fossil energy end uses with electric end uses, progressively decommissioning the infrastructure which supports the fossil fuel markets.

The new electric infrastructure constructed to replace the existing fossil fuel infrastructure is inflationary, as it is investment which results in no additional production, but merely replaces the current infrastructure supporting production. It also renders the current infrastructure progressively obsolete, arguably before the end of its useful life. This progressive obsolescence produces a societal cost with no offsetting economic benefit.

As the progressive obsolescence proceeds, the cost per unit of energy delivered by the fossil energy infrastructure would increase, causing further inflation, until the fossil energy infrastructure ceased operation. This progressive obsolescence affects the oil, natural gas and propane and coal industries, including exploration, production, distribution and sales.

The electric vehicle transition would obsolete a broad range of manufacturing facilities currently dedicated to the production of gasoline and Diesel vehicles and their unique components. The EV transition also requires construction of EV charging infrastructure on a national scale and the expansion of electricity transmission and distribution to support the distributed charging infrastructure.

The “all-electric everything” transition would ultimately require replacement of all fossil fuel residential and commercial end use appliances and equipment with electric appliances and equipment. Given appropriate lead time, this replacement could occur at the end of the useful life of the fossil fuel equipment. However, the high efficiency electric end use appliances and equipment required as replacements are currently 2-4 times as expensive as the fossil fuel appliances and equipment they would replace, producing further inflation as the replacement equipment would provide the same utility at substantially higher cost.

The residential and commercial equipment with the highest incremental installed cost are electric heat pumps, particularly cold climate heat pumps. This is especially true for buildings which are currently equipped with steam or hot water boilers for space heating and would require more complicated retrofit.

The residential and commercial appliance and equipment replacement would also likely require electric distribution system upgrades, utility service upgrades and installation of internal building wiring to serve end uses currently served with natural gas, propane or fuel oil.

The situation in the industrial markets is far more difficult to analyze since many of the current fossil-fueled production processes do not have commercially available electric substitutes and thus the transition infrastructure investment and the effects on operating costs are indeterminable.

The infrastructure investments required to serve new load growth from data centers and artificial intelligence are not inflationary, as they result in additional production rather than replacement of existing functional infrastructure.